Are 95% mortgages coming back?

The new year brings some good news for first-time buyers who find themselves locked out of the housing market because they cannot pull together a large enough deposit. The government is looking to bring back affordable 95% mortgages to create two million more owner-occupiers.

Boris Johnson announced the move at the virtual Conservative Party conference back in October. "We will help turn Generation Rent into Generation Buy," he said. The prime minister was reiterating a key manifesto pledge from 2019.

High loan-to-value mortgages were widely available at the start of 2020, but due to concerns of a coronavirus recession, many lenders withdrew them from the market. They set a new maximum of 85% LTV which requires a 15% deposit, well beyond many would-be buyers' reach.

How Will The New Scheme Work?

So far, the government has provided few details of the scheme, and it is not yet clear how it would work. At a time of economic uncertainty, financial institutions are unwilling to take on additional risks, but instead of the stringent stress tests they currently apply, the government could assuage their fears by underwriting 95% mortgages with public money. This would safeguard banks against losses if borrowers were unable to keep up with mortgage payments.

A similar scheme was introduced in the wake of the 2008 financial crash after banks and building societies withdrew high loan-to-value mortgages. Prior to that, buyers could access 100% loans.

Buying a home with a low deposit can put buyers at greater risk of negative equity if house prices fall. Faisal Islam, the BBC's Economics Editor, worked out how much this could potentially cost the country. He estimated that if two million people take advantage of the new plan and the average size of a first-time buyer mortgage is £185,300,  the scheme would require tens of billions of pounds worth of guarantees to cover potential losses. However, this would be money held in reserve, not necessarily spent.
 
Nonetheless, the return of 5% deposit mortgage deals is being welcomed by many renters who previously felt unable to realise their dreams of buying a home.